Energy service contract, what is it? This is an alternative financing mechanism authorized by the government of the Russian Federation. It is designed to accelerate investment in cost-effective energy conservation measures in existing federal buildings.
Energy Service Contracts (ESPC) allow agencies to carry out projects without upfront capital costs and without special government appropriations. The Energy Policy Act of 2009 allowed federal agencies to use private sector financing to implement energy conservation methods and technologies for its efficient use.
Energy service contract, what is it? This is a partnership between a federal agency and ESCO. The latter conducts a comprehensive energy audit for the public sector and identifies measures to save energy. In consultation with the federal agency, ESCO develops and creates a project that meets the needs and organizes the necessary financing. The ESCO guarantees that advanced technologies will result in sufficient energy savings to pay for the energy service contract. The project is paid during the term of the contract.
After the end of the contract, all additional savings are accrued to the agency. Savings must be guaranteed. Federal services may enter into a multi-year energy service contract for a period not exceeding 25 years. Consider the features of such a contract, its advantages and disadvantages.
Federal policy
We continue to consider the essence of the energy service contract. What it is? This is a normative act developed by the federal energy management program and the Ministry of Energy, according to Law No. 261-ФЗ dated November 23, 2009. The resolution created on the basis of this document entered into force one year after its adoption.
Energy efficiency contracts are also widely used in government housing and urban development. This happens in the form of lower utility costs. Unlike federal ESPCs, ESPC public housing is an energy service contract project approved and implemented by authorities with or without ESCO assistance, as these persons are legally authorized to be liable for debts. Organizations involved in the public housing process usually do not need to finance a project, but are merely providers of architectural or engineering services.
Impact
As of March 2010, over 550 ESPC projects worth $ 3.6 billion were provided to 25 federal agencies and organizations in 49 states and the District of Columbia. These projects saved approximately 30.2 trillion dollar annually.
The initial program was launched by John Rogers, who worked in the engineering command of naval facilities. But, unfortunately, large-scale implementation did not begin until the government adopted the necessary legislation for the energy service contract.
Department of Energy
The data of the energy saving agreement are documents in which the term and quantity are not indicated in exact dates.They are designed to make ESPC as practical and cost-effective for federal agencies. The Department of Energy has published these “umbrella” ESCO contracts based on their ability to fulfill the conditions set out in the documents. ESPC can be used for any public facility worldwide.
Benefits
Energy-saving contracts help federal agencies achieve their goals in the areas of renewable energy efficiency, water conservation and emission reduction by streamlining energy management design. Optimized financing provides many benefits.
1. Improving the quality of implementation of plans and cost.
- Access to private sector experience in energy efficiency, renewable energy, water conservation and emission reduction.
- Built-in incentives for ESCOs to provide high-quality equipment, timely service and thorough commissioning of the project.
- Improving infrastructure to enhance mission support.
- More healthy, safer working and living conditions.
- Flexible, practical contract and procurement processes to ensure the project.
2. Objective technical support through government programs.
- Provided legal and financial guidance, project facilitators, advanced technology experts, training for federal agencies.
3. Smart management.
- Provides increased efficiency of construction and new equipment without initial capital costs.
- Funds technology without relying on special government appropriations.
- Minimizes vulnerability to financial impacts due to volatile energy prices, weather and equipment failure.
- It guarantees energy savings and associated operating costs.
- Enhances planning, budgeting, and billing for energy, usage, and maintenance.
- This is what the advantages of an energy service contract look like. Cons and shortcomings are also available, they will be discussed below.
Cost
The state ESPC management program costs about $ 10 million a year for administration and an additional $ 1 million for monitoring contract execution. On average, the state spends about 500,000 on the development of each document, providing a very generous impetus for ESCOs. When accruing interest for 25 years on one contract, the objects are much more expensive than if the government simply allocated them financing, and did not invest in them for long periods of time.
Performance issues
FEMP has discovered a number of ways to identify a supplier of energy service contracts and monitor ESPC performance over the life of documents. However, the vast majority of liabilities are based on agreed, rather than actual, measured savings. This means that the parties agree on technical calculations at the beginning of the contract and should never measure actual results after that.
Internal research showed that it was impossible to determine from many documents whether performance goals and savings were achieved. After several years of work, when staff turnover reached high levels, many of these projects were no longer controlled. But to this day, the vast majority of ESPC contracts are based on predetermined rather than actual measured values.
Energy Efficiency in Switzerland
In this country, the Swissesco business association promotes and develops the ESPC. This model supports the goals of the 2050 Swiss Federal Energy Strategy to promote energy efficiency. The company was founded in September 2015.Its members are enterprises, engineers, financial institutions, as well as cantons, cities and leaders concluding municipal energy service contracts. The association is supported by the Swiss Federal Office of Energy and several cantons. The company is working on the following strategic priorities:
- Creating a business environment that supports the development of the Swiss Energy Services Market (ESCO), as well as specific projects.
- Standardization of methodologies and processes.
- Energy Efficiency Contracting Information.
- Coordination with other business associations and institutions.
- Creation and management of a knowledge base for the energy services market.
In 2016, Swissesco developed the Energy Efficiency Contracting Guidelines with the support of the Federal Office of SFOE. It is available in German and French. This methodology explains in detail the planning, development and implementation of projects in Switzerland.
Other countries have made similar efforts in the past, but they did not include a specific environment for tendering in the country. The Swiss guide is comparable to the German document Deutschen Energieagentur (DENA) or the federal state of Hesse. It was also created thanks to the efforts of the European Energy Service.
The Swiss guide is available for free download and explains how the structure works, what you can and cannot do. The open tender procedure is explained gradually and illustrated with useful infographics. The manual also contains important tools for the analysis and implementation of projects, such as, for example, samples of an energy service contract. Thus, the manual is not only theoretical, but also practical.
As a rule, a contract is a rather voluminous document. The first sheet may look like this:
The following lists all the concepts and terms that are used in the document so that there are no misunderstandings.
The following paragraph details the subject of the contract. It is indicated that the energy service company will undertake to save energy and other resources for its customer. Indicators and prices for all resources are given. The cost of the work to be performed by the energy service company is also given, all terms and conditions of payment are agreed. At the end, the bank details and addresses of the parties, the date of preparation of the document, the number of copies are indicated.
Energy service contract: what is it
Energy service agreements are based on the characteristics within which the supplier agrees to finance, develop and implement projects in the field of efficiency and renewable energy for customers without any upfront capital expenditures.
Using this financing model, a person or company agrees to recoup the costs of the project by saving resources, which were spent on utilities over the life of the project. Profit is made immediately after the project is connected. At the end of the term, when all the costs of the project are paid off, the customer saves all the savings and continues to pay for reduced utility bills.
How the program works
The owner of the building enters into an agreement with the supplier. A person can also draw up third-party contracts, such as ESCOs, construction companies and engineering firms for project management expertise. In this way, the supplier may also agree to be responsible for providing ongoing maintenance, updates and improvements to ensure the continued success of the project. As a rule, suppliers assume the risk of unintended expenses in order to justify the investment by providing guarantees of efficiency.
Associated Renewable Resource Energy Services Agreement Structure
Associated Renewable provides financing to business owners who want to upgrade their buildings without any upfront capital expenditures. In accordance with the energy services agreement, the director pays for the use of the resource a little less or equivalent to his historical base level.
The initial line shows what costs would be without modernization. During the validity period, the energy savings resulting from the project are used to pay for the energy service contract. Payment is made for new equipment at this stage. When the ESA expires, the building owner benefits from a complete reduction in utility bills and saves all savings on resource bills.
The contract can provide cost-effective measures to overcome barriers to energy efficiency. These contracts allow the client to reduce operating costs, transfer risk and focus on core business. However, the model of energy services may be suitable only for the same type of subgroup and organizations using this resource.
The challenge for both business strategy and public policy is to identify those situations in which an energy service contract is most likely to be appropriate. It also clarifies the conditions under which it is most likely to be successful.
An energy service contract is a form of outsourcing. It will be selected only when the expected decrease in the cost of services can more than compensate for transaction costs. Production costs will be determined by a combination of the physical characteristics of the power system and the technical effectiveness of the relevant organizational measures, including economies of scale and specialization.
Transaction costs will be determined by the complexity of the energy service, the “specificity” of the investments made by the contractor, the competitiveness of the services market and the relevant legal, financial and regulatory aspects. The document develops these ideas into a common structure that can be used to assess the feasibility of concluding a contract for the provision of energy services in various circumstances. The structure leads to a number of hypotheses that are suitable for an empirical test.
Who sets the requirements for the terms of an energy service contract?
Improvements are made by companies that develop and implement energy saving measures and guarantee resource savings.
The attached paper guidelines provide organizations with an understanding of the structure and specific areas of the document. For example, they answer the question of who sets the requirements for the terms of an energy service contract.
A guide to best practices was developed not so long ago. Its main task is to help users establish moments for considering ways of determining a supplier when concluding an energy service contract. This guide is based on the experience of such successful projects.